Ongoing Security Concerns In Kurdistan Have Oil Companies On Edge

Iraq has successfully ramped up oil production in recent months despite ongoing violence. According to Deutsche Bank, Iraq produced 4.1 million barrels of oil per day in June, a record high.

But even though the country as a whole is making significant production gains, some of the private companies operating in Iraq – in particular those companies in the country’s north – are facing a series of security and political challenges that are complicating their financial positions.

First, oil companies Genel Energy, Gulf Keystone Petroleum, and Norway’s DNO have sizable operations in Kurdistan, a semi-autonomous region in Iraq’s north. But the Kurdish Regional Government (KRG) and the central government in Baghdad have been at loggerheads for years over sovereignty and control over oil wealth. The KRG has long wanted greater autonomy and the ability to export its own oil while Baghdad wanted Kurdish oil to be exported under the auspices of the national government. Related: Why Bigger Is No Longer Better In Energy

A tentative deal reached late last year that saw Kurdish oil exported under the purview of the central government, and in exchange, the Kurds would receive their share of national revenue. That deal unraveled in recent weeks. Baghdad has struggled to pay the KRG due to low oil prices. In turn, the KRG has run short of funds, owing back wages to public employees and even its own security forces, the Peshmerga. As a result, the KRG has taken control of some of its oil, trying to sell it on its own.

But the shortage of cash has meant that the KRG has not paid private oil companies what they are owed. According to Argus Media, DNO is owed $700 million by the KRG. Also, the KRG owes Genel Energy $378 million and Gulf Petroleum $100 million.

That comes despite a 41 percent increase in production for Genel so far this year. DNO also doubled production at its Tawke field. The companies hope to eventually be paid, but it is unclear when that might happen. They continue to operate, although Genel has called off further exploration until at least the end of 2015. The uncertainty has caused their share prices to plummet this year despite the production gains, and questions are starting to rise about their ability to keep the lights on. Related: Will ‘Corner Office Syndrome’ Be The Downfall Of Canada’s Oilfield Services?

The Kurdish government is tapped out at this point. “It is three or four months since the Peshmerga were paid. We need money now,” Ashti Hawrami, the KRG’s minister of natural resources, said in June, according to the FT. “We are asking companies to bear with us for another month and give us free oil.”

But things could get worse. Violence has spread into Turkey from neighboring Syria and Iraq. Turkey has largely stayed on the sidelines during the Syrian civil war and the spread of ISIS, but Turkey has accused Islamic State militants for a suicide attack that killed 32 people on July 20. The U.S. and Turkey announced an agreement that would allow the U.S. to launch airstrikes from Turkish territory, something the Turkish government has been reluctant to allow.

Turkey decided to launch airstrikes over the weekend against targets of the Kurdish Worker’s Party (PKK) in northern Iraq, which it blames for the pipeline attack. Turkey and the PKK have been at odds for years, as the PKK has pushed for greater autonomy in southeastern Turkey, on the border with Syria, Iraq, and Iran. But with the pipeline explosion and airstrikes, the situation has suddenly taken a turn for the worse.

The airstrikes mark the severing of a two-year ceasefire. Turkey met on July 28 with its NATO allies to discuss the airstrikes on both ISIS and PKK targets, although it has not requested any assistance.

The violence threatens to bring even greater uncertainty and turmoil to Kurdistan, creating deeper challenges for private oil companies operating there. Genel Energy’s stock is down more than 10 percent since last week.